Pub. 8 2018 Issue 2

19 ISSUE 2. 2018 growth, operational simplification, risk management, and cost efficien - cy. Simply put, regulatory compliance should be aligned with busi- ness strategy. Not doing so could put banks at risk of unmet regulatory expectations and subpar performance. Regulatory compliance should also figure prominently into the “portfolio of change” that banks need to make and manage—at both the individual business and enterprise level. This portfolio of change requires leaders to consistently apply a standard of due care in manag- ing businesses. Heightened focus on executive accountability is also being codified in regulatory expectations such as the Senior Managers Regime in the United Kingdom. 8 In the face of Brexit uncertainty, banks prepare for maximum change The uncertainty over Brexit negotiations between the United Kingdom and the European Union is forcing banks to prepare maximum change contingencies that have the potential to be operationally disruptive, legally challenging, and financially demanding. Institutions are taking on the tough task of setting up new operation- al entities in Europe following the potential loss of “passporting” arrangements for UK-regulated entities. After which they will have to determine the size and scope of these new entities, relocate or hire new personnel, commit fresh capital to meet local regulatory demands, and revamp recovery and resolution plans to address these new challenges to their operational integrity. Some banks have already taken action in this regard. Others may yet act in defense of their competitive position and to protect their ability to operate smoothly. These decisions are likely to create long-term impacts not only for banks, but also for London as a global financial center. Eventually these shifts could contribute to fragmentation of banking and capital markets businesses on the continent, with unfore- seen implications. Technology management To help banks become more agile, bank chief intelligence officers (CIOs) should manage their portfolio of technology assets to em- phasize activities that truly differentiate the bank. Externalization efforts should be focused on generic functions with an emphasis on cost efficiencies. Technology resources at most banks are becoming difficult to manage, with a hodgepodge of systems, platforms, software, and tools—much of it legacy infrastructure that demands significant resources and capi - tal to ensure that operations run smoothly. As such, modernizing core operating infrastructure is an obvious priority. Modernization ranked as the most important information technology (IT) trend for nearly a quarter of global banking respondents in the 2016 Ovum ICT Enter - prise Insights survey. 9 To “change the bank,” CIOs have to simultaneously ensure that new solutions sourced from multiple external vendors are integrated to maximize value creation, while minimizing internal disruption. To make this happen, tech budgets at banks will likely continue to expand; Gartner’s research shows the global banking industry will spend $519 billion on IT in 2018, up 4.1 percent year over year from $499 billion in 2017. 10 Money itself is not typically enough. In their drive to simplify and mod- ernize, and to build technology agility, banks should ask themselves three important questions: 1. How can they best manage the portfolio of technology assets to deliver the most impact for businesses? 2. What is the right level and type of technology externalization (i.e., the use of third-parties to design, develop, and manage technology solutions)? 3. How do they direct development resources toward only the activi- ties that truly create competitive differentiation? Fortunately, the proliferation of technology vendors and platforms, and the maturation of cloud solutions, has made technology externalization more viable. Of course this is not a new concept for banks, but there is often a need for a significant ramp-up in externalization to ensure that the institution remains competitive in the marketplace. Banks’ technology groups can play a key role in orchestrating this new model of externaliza - tion, and ensure that these efforts have the greatest business impact. Admittedly, externalization is not the answer for every core activity— there will still be some activities, such as compliance and risk manage- ment, that will usually be maintained internally, and for which internal technology support would remain critical. Managed services for mission-critical activities that require special- ized technical talent, but offer limited competitive differentiation to the firm, 11 are one example of externalization. Additionally, external service providers could automate compliance processes to eliminate hours of manual labor, but with bank employees handling the final layer of analysis and reporting to maintain accountability to regulators. An externalization strategy typically also means more discipline in selecting technology vendors, with greater emphasis on high-quality software asset and business expertise (in mortgage servicing versus demand-deposit-account processing, for instance). Multi-business institutions may prefer a hub-and-spoke model—with a wide variety of domain-specific third-party relationships—and reconfigured vendor contracting, risk management, and oversight practices, accordingly. Externalization can also play a pivotal role in application modern - ization—in the form of rationalization, replatforming, refactoring, or rewriting code, and enabling platforms to migrate to the cloud. In 2018, we expect a “modest step to a big leap” in the way technol- ogy units within banks begin to transform themselves and redefine both their role and value within the organization. Breaking institu- tional barriers to such change may prove to be a big challenge. 2018 Banking Industry Outlook w Continued on page 20